Which of the following best describes a diversification strategy in economics?

• A. Focuses solely on increasing production of a single product.
• B. Is used only when a firm faces perfect competition.
• C. Requires a firm to specialize in its core competency.
• D. Involves expanding a firm's operations into new markets or products to reduce risk.

Answer: (D)

Verified step by step guidance

1. Understand the concept of diversification strategy in economics: it involves a firm expanding its operations into new markets or products to spread risk and reduce dependence on a single source of revenue.
2. Compare diversification with other strategies such as specialization, which focuses on a firm's core competency rather than expanding into new areas.
3. Recognize that diversification is not limited to firms facing perfect competition; it can be applied in various market structures to manage risk.
4. Note that focusing solely on increasing production of a single product is the opposite of diversification, as it increases risk by concentrating resources.
5. Conclude that the best description of a diversification strategy is the one that highlights expansion into new markets or products to reduce risk.